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Emerging Markets Roundup: Brazil

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In what is ranked as one of the largest acquisitions ever by a Norwegian company, Norway's Norsk Hydro aluminum producer signed a $4.9 billion deal to acquire the aluminum business of Brazil's Vale, Latin America's largest iron ore exporter. The Norwegian company will pay Vale $1.1 billion in cash, while also giving it a 22% stake in Norsk Hydro. The transaction includes most of Vale's bauxite, alumina and aluminum assets in Brazil, with analysts estimating the deal guarantees Norsk Hydro's bauxite supplies for as much as a century. The acquirer, which is being advised by Citi, is financing the purchase through a $1.7 billion rights offering. The acquisition is slated to close during the fourth quarter of this year.

While the Brazilian government has revised its 2010 GDP growth forecast upward to between 5.5% and 6.5%, from a previous 5.2%, there are concerns brewing over a possible overheating ahead. Bradesco is even more optimistic, predicting growth as high as 7%, following last year's 0.2% contraction. The government feels it can still avoid an overheating by gradually tightening fiscal policy, though analysts are not as convinced. As a first step to curb demand and inflationary pressures, the central bank hiked its Selic benchmark interest rate by an aggressive 75 basis points in late April, to 9.5%, marking the first increase in almost two years. Fueling overheating concerns was a higher-than-expected 19.7% year-on-year rise in industrial production in March that was the largest annualized gain since 1991. Output is being sparked by government stimulus measures, improved access to consumer credit and a drop in unemployment to around 7%.

Automakers are expected to invest some $11.2 billion in Brazil over the next two years to take advantage of growing consumer demand, according to the Anfavea carmakers' association. Brazil is already the world's fifth-largest market for automobiles and is a key market for Fiat, Volkswagen, GM and Ford, all of which have local plants. Automobile sales rose 16.7% year on year in April, with the figure rising to 18.55% if sales of buses and trucks are included. Automobile sales are being driven partly by an end in March to the government's tax break for car buyers, which created a rush for auto purchases.

In a bid to halt the country's deteriorating trade surplus, the Brazilian government is creating a new export finance agency modeled after the US Export-Import Bank. Brazil's first-quarter trade surplus declined 67.4% year on year, to $2.18 billion. Exim Brasil will offer long-term financing for export industries as part of a broader government plan that includes an increase in government purchases of domestic goods over imports, elimination of tariff reductions for imports of auto parts, creation of a $1 billion foreign trade guarantee fund and the establishment of an export insurance company. The 12-month current account deficit through March was equal to 1.8% of GDP, and authorities expect the gap to end the year at between 2.2% and 2.3%.

Brazil has revived plans to complete the controversial Belo Monte dam project, which increasingly vocal opponents, including many international celebrities, charge will harm the Amazonian region's delicate ecosystem and displace large numbers of indigenous people. The dam, which will be the third-largest in the world, will harness parts of the Xingu River, an Amazon tributary, to produce 11,000 megawatts of electricity. While the project has been on hold for several decades amid ongoing legal challenges, the government says the dam is a key component of its energy program. Brasilia has been unable to attract international financing for the project on account of the public uproar but now says it will complete the project using its own resources.

The number of Brazilians with broadband Internet access is expected to more than triple through 2014 after the government committed to investing nearly $7 billion to increase penetration among low-income users. The target for the National Broadband Plan is to increase the number of Brazilian households with Internet access to 40 million from a current 12 million. Users will be charged a monthly fee equal to between $8.50 and $20, depending on tax incentives. The government hopes the move will boost competitiveness and social inclusion, while facilitating development of SMEs seeking new markets. The project will be managed by Telebras, the state-controlled telecommunications company.